The Logic of Our Iran Sanctions

Accelerate them now.

Reuel Marc Gerecht and Mark Dubowitz

January 3 - January 10, 2011, Vol. 16, No. 16

Even before the recent inconclusive nuclear talks with Iran in Geneva, President Barack Obama undoubtedly agreed with France’s national security adviser, Jean-David Levitte, when he described Tehran’s approach to nuclear negotiations with the West as a “farce” and the dictatorship of Supreme Leader Ali Khamenei as “fascist.” More aggressively than any president since Jimmy Carter, Obama has used sanctions against the Islamic Republic. The White House and the State Department have deployed a “coalition of the willing.” Washington has assiduously avoided punishing any major European, Russian, or Chinese transgressor of U.S.-mandated sanctions; rather, the administration has chosen to encourage compliance by underscoring the common threat of an Iranian bomb while suggesting that an American economic hammer, wielded by an increasingly pugnacious Congress, will eventually come down on malefactors.

Administration officials will tell you that the president aims only to coerce Khamenei into a compromise; privately, they’ll admit that his aim is to contain a nuclear Iran if sanctions fail to stop uranium enrichment. But few in the administration now believe that Khamenei will compromise unless sanctions endanger his regime. And containment, which is what Washington does when it wants to wage war without direct confrontation, is a regime-change strategy: Political and economic isolation is designed to nurture Iran’s convulsive internal contradictions, vividly on display after the June 12, 2009, elections. The contentious issue in Iran policy isn’t the goal​—​do we want Khamenei and his Revolutionary Guards to fall? Democrats and Republicans differ on this far less than they did when President George W. Bush saw an “axis of evil.” The issue is timing: Can we put enough pressure on Khamenei and his praetorians to either crack the regime or make the supreme leader believe that the nuclear program actually threatens his rule?

The administration may try to avoid the inevitable​—​sanctions that significantly curtail the export of Iranian oil​—​by playing with the idea that the West and Tehran can settle for some enrichment inside the Islamic Republic that doesn’t allow for processing the quality and quantity of uranium for nuclear weapons. But such a “compromise” doesn’t pass the pinch test: There is no way the West can monitor Iranian compliance without an intrusive inspections regime, which Khamenei has adamantly refused. Tehran has often dodged the International Atomic Energy Agency’s current, polite inspection procedures and questions about suspicious Iranian behavior. And as the French, who’ve been deadly serious about nuclear proliferation since the first Gulf war in 1990-91, constantly point out, any enrichment will now allow Tehran the intellectual and mechanical means to advance weaponization. Western advocates of some enrichment are usually the same folks who don’t see Khamenei’s and the Revolutionary Guards’ possession of nuclear weaponry as all that worrisome. If you’ve already conceded the supreme leader an atomic bomb, enrichment isn’t an issue.

A negotiated “deal” with Tehran that concedes Iranian enrichment is a face-saving way for the West to avoid confessing that it would rather risk Khamenei’s having a nuke than face the two alternatives: a crippling sanctions regime, which could spike the price of oil, or an American preventive military strike.

But this avenue of escape isn’t open to the White House for a few simple reasons. First, such a deal would leave Khamenei apoplectic. Any agreement that would effectively stop the bomb potential of Iran’s 20-year nuclear program would be an enormous defeat. It’s now clear that the supreme leader wasn’t particularly fond of the nuclear talks with the European Union that began in 2003. Those talks, which dead-ended in 2005, became unacceptable when EU demands for a (temporary) suspension of uranium enrichment and the “Additional Protocol”​—providing for intrusive inspections​—​became unavoidable. Since the elections of June 12, 2009, we have watched the supreme leader unleash his security forces to torture his country into political quiescence. He has manhandled, driven into exile, and imprisoned most of the “moderate” forces with whom the West once hoped to deal. Seyyed Hossein Mousavian, one of the architects of the enrichment-pausing “Paris Agreement” of November 2004, now lives in exile in the United States, having fled Iran with his family. Has Khamenei triumphed over his internal enemies only to trade away the historic achievement of his regime? Psychologically, culturally, and religiously, this option for him makes no sense.

Conversely, no one else in the region will believe that a deal that leaves Iranian uranium enrichment in place is anything other than a rout of the West. The “EU-3” nuclear negotiations with Iran are the most important diplomatic undertaking that Brussels has attempted. (France, Great Britain, and Germany have represented the EU in these talks.) The Europeans, like the Americans, like the United Nations Security Council, have stated repeatedly and clearly that uranium enrichment by Iran without a full accounting of its nuclear program and complete access by IAEA inspectors to Iran’s known and suspected nuclear facilities is “unacceptable.” Such an enrichment “compromise” now would most likely guarantee that the Saudis would remind the nuclear-armed Pakistanis that it’s time for a little brotherly, Sunni Muslim tech transfer. The odds that others​—​especially the Egyptians and Turks​—​will also start down the nuclear path aren’t small. And unless Benjamin Netanyahu and much of Jerusalem’s political elite are just bluffing, the countdown for an Israeli preventive strike starts when the West concedes uranium enrichment to the supreme leader and his Revolutionary Guards.

And third, such a deal politically offers Obama nothing. Many Democrats and most Republicans would pounce on him for agreeing to “monitored” Iranian enrichment, which would likely collapse before American negotiators could fly home. The U.S.-led sanctions regime has shown that Washington can still have a significant impact on the Islamic Republic’s economy and politics (the foreign minister just got fired, and to minimize the impact of sanctions, the regime is cutting gasoline subsidies, which will either save the treasury billions or lead to crushing inflation). The near-miraculous attack of the centrifuge-destroying Stuxnet virus has bought the administration time and further strengthened those who want to use sticks to stop Khamenei’s nuclear aspirations.

In Washington, an unrelenting sanctions logic has developed. It has also anchored itself in Ottawa and jumped the Atlantic and the Pacific. United Nations Security Council resolution 1929 has been much more powerful than the three resolutions before it because the Europeans, the Japanese, and the South Koreans have chosen to interpret it more aggressively than they have in the past. The trick for Washington now is how to ratchet up significantly the pain in Tehran while encouraging our allies to continue to do more than they’d originally thought possible. The administration may be right (though we remain skeptical): As long as the Americans, the Europeans, and some of the big Asian players are voluntarily implementing more and more sanctions, the cumulative effect may be a punishing tidal wave, which any transgressions by the Chinese, Russians, and our allies are powerless to stop. Washington needs an incremental approach​—​implemented rapidly​—​that does not spook the oil markets and that allows for the market and increasing oil supplies from Iran’s competitors to dull the effect of less Iranian crude being traded. We need to continue to invest the Europeans in the project, allowing them to own, as they have since 2003, negotiations with the Islamic Republic.

Thinking always of Khamenei’s Achilles’ heel, Washington should aim its efforts at cutting foreign Iranian crude oil purchases. The Europeans have already cut tech transfers to and future investments in Iranian oil and natural gas, severely damaging Tehran’s ability to sustain current production. The Chinese, while backfilling on some of these investment deals, are sharply reducing their purchases of Iranian crude. China cut crude imports from Iran between January and September 2010 by approximately 17 percent from the same period in 2009, even as the world’s biggest energy consumer bought more oil. Japan, too, is cutting back. The Japanese reduced purchases of Iranian crude by over 19 percent in the first eight months of 2010; in August alone, Japan cut its purchases by 31 percent. While Iran was Japan’s third- largest supplier of oil in June 2010, by August of this year it was in sixth place. Neither the Japanese nor the Chinese want to bet their economic security on an Iranian energy sector in rapid decline.

The administration can greatly intensify the “hassle factor” in buying Iranian crude by exposing the role of the Revolutionary Guards in the crude-oil export supply chain​—​and then using the law prohibiting commerce with the Guards to sanction foreign enterprises involved with them. The Treasury Department’s recent decision to sanction the Pars Oil and Gas Company, which is a Revolutionary Guard front company involved in gasoline trading and the development of some of the largest oil and natural gas fields in the Middle East, is a good example of the type of punitive designation that can greatly complicate Iran’s energy planning.

Using the preamble of Security Council resolution 1929, which establishes the nexus between Iran’s cash-generating energy sector and the sanctioned nuclear program, the United States and its allies can also pass additional measures to prohibit long-term purchase contracts for Iranian oil and natural gas. And large up-front cash payments by foreign companies for Iranian oil and natural gas can be banned, as well as any energy bond issued by an Iranian entity (by prohibiting any foreign underwriter, purchaser, or financial institution from facilitating the issuance of a bond).

Current U.S. and EU rules severely limit investments in the Islamic Republic’s oil and natural gas sectors. In the case of U.S. law, the investment limit is $20 million per year. Large upfront cash payments on oil or natural gas purchases give the Iranians instant access to money to invest in their increasingly capital-starved energy sector. And by using long-term supply contracts to collateralize billions of dollars in energy bonds, the regime could circumvent sanctions. Bondholders require evidence that Iran can make payments on bonds, and one simple way to produce such evidence would be to sign a long-term supply contract, using the resulting guaranteed revenue stream in hard currencies to collateralize the paper issued.

The United States and the EU need to close any loopholes that would allow this kind of investment activity. Using the political cover of the preamble of resolution 1929, Washington or the EU can also introduce measures to sanction any pipeline project (and its participating partners) transporting Iranian oil or natural gas, or any shipping company, insurance company, or financial institution that provides support to an Iranian oil or natural gas trade. Needless to say, Washington or the EU can disqualify for any government contracting in America or Europe anyone buying Iranian oil or natural gas. As crude oil and natural gas buyers find it increasingly difficult to use banks to settle or extend credit for Iranian oil and natural gas trades, these buyers will seek alternative sources. Washington can also bar the participation in any U.S. energy deal (shale and offshore leases, for example) of any company that buys or facilitates the purchase of Iranian oil or natural gas. Nor would it be difficult for Western governments to sanction any company participating in overseas energy development or production involving an official Iranian company or any Revolutionary Guard Corps-affiliated entity.

Such punitive measures could significantly reduce the Islamic Republic’s ability to produce 3.7 million barrels of oil per day, just over 4 percent of daily world production. Provided the United States and its allies could get more oil on the market—the Iran-loathing Saudis could increase production, for example, and more oil from Canada’s enormous tar sands could hit the market, and President Obama could lift the moratorium on offshore oil rigs in the Gulf of Mexico—then the world oil market would have considerably more elasticity than does the Iranian economy, which is already under stress.

Some of the possibilities above have been introduced into the Sherman-Casey-Brown bill in Congress. It would probably take little time for this legislation and other measures like it to cause a financial crisis in Tehran the likes of which the mullahs have not seen since the Iran-Iraq war.

The issue for the Obama administration is whether it will have the foresight to accelerate sanctions that are probably coming in any case. The next round of Euro-American talks with Iran is scheduled for January. Gary Samore, the White House’s nuclear proliferation point man, has already let it be known that more sanctions are on the way. Yet it is one thing for the administration to know intellectually that Khamenei will not buckle without the severest pain; it is another matter to overcome the State Department’s love of diplomatic gradualism. Anyone who has spoken to administration officials who are doggedly trying to stop the Iranian bomb knows how easily the love of the sanctions process can turn that process into an end in itself. But the key to successful diplomacy with Khamenei’s Iran is to view engagement as the supreme leader does: All scenarios are win-lose. If the West is to stop Tehran’s quest for a nuke, it must convince the supreme leader, and the Revolutionary Guards who oversee Iran’s nuclear program, that their pursuit of the bomb will destroy the regime.

When dealing with Tehran, it’s always good to remember Ruhollah Khomeini, whose iron-willed charisma gave birth to the Islamic Republic. The ayatollah relented in his war against Saddam Hussein, who’d invaded Iran in 1980, when he finally saw that the conflict would destroy his new nation. One of the men who convinced Khomeini that Iran had to sue for peace was Khamenei. He understood that the Islamic Republic could not possibly win with the West​—​especially the United States​—​aligned against it. (The accidental downing of Iran Air Flight 655 by the USS Vincennes in the Persian Gulf in July 1988 was viewed as an intentional, heart-stopping act of war by Tehran’s ruling elite.) Khamenei undoubtedly remembers what it took to break his will​—​what it took to crack Khomeini’s bellicose determination​—​to fight. The objective of American diplomacy should be to reanimate those memories.

Indirect demand-side sanctions on the Islamic Republic could possibly accomplish what an embargo could do without the diplomatic trauma. If the European Union can lay the groundwork for the slow-motion death of Iran’s oil and gas exploration business, which it already has, it can probably see its way to further constricting Iran’s energy sector. Nuclear counterproliferation is a holy of holies for Europeans. This is even truer in Washington, where surrender just isn’t an option for a Democratic president soon facing reelection.

So let us see whether Khamenei can withstand a united West. With these sanctions, we just might not need the Chinese and the Russians to help out. Even though the Stuxnet virus has bought us some time, Iran’s nuclear program is still advancing. The old Persian counsel against complacency and sloth would be wise to remember. Harcheh zudtar behtar​—​the sooner we find out whether we can make the supreme leader conceive again of the awfulness of 1988, when surrender became thinkable, the better. Current sanctions and the regime’s atrocious economic management have brought hard times. For the United States and its allies to be successful, the times need to be made a good deal harder still.

Reuel Marc Gerecht is a contributing editor to The Weekly Standard, a senior fellow at the Foundation for Defense of Democracies, and the author of the forthcoming The Wave: Man, God, and the Ballot Box in the Middle East. Mark Dubowitz is the executive director of FDD.